Week 1/chapter 15

Question 1

What are the three ways to analyze financial statements

Answer 1

1. Horizontal
2. Vertical
3. Ratio

Question 2

The study of percentage changes in line items from comparative financial statements is called

Answer 2

Horizontal analysis

Question 3

this analysis of the financial statement shows the relationship of each item to its base amount, which is the 100% figure. Every other item on the statement is then reported as a percentage of that base.

Answer 3

Vertical analysis

Question 4

This analysis can be used to provide information about a company’s performance. It is used most effectively to measure a company against other companies in the same industry and to denote trends within the company.

Answer 4

ratio

Question 5

A report that provides information about a company’s financial condition for the year

Answer 5

annual report

Question 6

This section of the annual report is intended to help investors understand the results of operations and the financial condition of the company. It is important to realize that this section is written by the company and could present a biased view of the company’s financial condition and results.

Answer 6

Management’s Discussion and Analysis (MD&A)

Question 7

This is a report that is filed for investors who want to know if a company’s values align with theres

Answer 7

Environmental, social, and governance (ESG) reports

Question 8

This equation measures the ability to meet short-term obligations with current assets. Name and state the formula

Answer 8

Working capital
Working Capital = current assets - current liabilities

Question 9

Difference between trend analysis and horizontal analysis

Answer 9

Horizontal is from one year to the next, trend is from base year forward

Question 10

A vertical analysis that compares company to company with percentages only

Answer 10

Common size statement

Question 11

Best practice of comparing a company’s performance with the best practices from other companies.

Answer 11

Benchmarking

Question 12

ratio helps to determine a company’s ability to meet its short-term obligations. Name and state the formula

Answer 12

Cash ratio = cash+cash equivalents/total current liabilities

Question 13

ratio(sometimes called the quick ratio) tells us whether a company could pay all its current liabilities if they came due immediately.

Answer 13

acid test ratio (cash and equivalents+short term investments+net current receivables)/total current liabilities

Question 14

The most widely used liquidity ratio is the _______________ __________, which measures a company’s ability to pay its current liabilities with its current assets. Name and state the formula

Answer 14

Current ratio = total current assets/total current liabilities

Question 15

what does a high current ratio mean

Answer 15

The company has sufficient assets to maintain operations

Question 16

What does a cash ratio above 1 mean

Answer 16

The company is holding to much cash that could be used to generate more profit

Question 17

ratio measures the number of times a company sells its average level of merchandise inventory during a year.

Answer 17

Inventory turnover ratio = cost of goods sold/average merchandise inventory

Question 18

This measures the average number of days merchandise inventory is held by the company

Answer 18

Days’ sales in inventory ratio
365 days/Inventory Turnover

Question 19

This ratio measures the profitability of each net sales dollar above the cost of goods sold

Answer 19

Gross profit percentage = gross profit/net sales revenue

Question 20

ratiomeasures the number of times the company collects the average receivables balance in a year.

Answer 20

Accounts Receivable turnover ratio = net credit sales/average net accounts receivable

Question 21

shows the proportion of total liabilities relative to total equity

Answer 21

Debt to equity ratio = total liabilities/total equity

Question 22

The relationship between total liabilities and total assets

Answer 22

Debt Ratio = total liabilities/total assets

Question 23

The relationship between total liabilities and total equity that shows the proportion of total liabilities relative to total equity

Answer 23

Debt to Equity Ratio = Total Liabilities/Total equity

Question 24

Analysts, investors, and creditors use the _________________ ratio toevaluate a business’ ability to pay interest expense

Answer 24

Times interest earned ratio = (net income + Income tax expense + interest expense)/Interest expense

Question 26

evaluates a business’ ability to pay interest expense

Answer 26

times-interest-earned ratio = (net income+net tax expense+interest expense)/interest expense

Question 27

often shortened to return on equity. This ratio shows the relationship between net income available to common stockholders and their average common equity invested in the company.

Answer 27

rate of return on common stockholders’ equity = (Net income - preferred dividends)/average common stockholders’ equity

Question 28

reports the amount of net income (loss) for each share of the company’s outstanding common stock

Answer 28

Earnings Per Share = (net income - preferred dividends)/ weighted average number of common shares outstanding

Question 29

is the ratio of the market price of a share of common stock to the company’s earnings per share

Answer 29

price/earnings ratio = market price per share/earning per share

Question 30

shows the proportion of assets financed with debt

Answer 30

debt ratio= total liabilities/total assets

Question 32

the ratio of annual dividends declared per common share relative to the earnings pers share

Answer 32

Dividend payout = annual dividend per share/earnings per share